Bias in Financial Reports

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Bias in Financial Reports This essay examines sources of bias in financial reports and therefore considers a range of principles and theories. Users of financial statements need the information contained in financial reports to be free from bias. Users would prefer that financial statements present a balanced view of a company's affairs, one that attempts to convey information as neutrally as possible. This preference occurs because more information equates to less uncertainty. The more information is available, and the better the quality of that information, the better the capital market is able to allocate resources efficiently. Less uncertainty results in less risk and in lower risk premiums (Foster, n.d.). This requirement for neutral financial reporting is so important to investors that the SEC maintains and enforces financial accounting standards specifically designed to achieve neutrality. Yet, bias in financial reporting occurs, whether it is deliberately or unintentionally introduced. Various accounting and economic theories have been introduced to explain and predict the occurrence of biased accounting practices. Positive accounting theory (PAT) offers one such attempt to make accurate predictions regarding real world events as captured by accounting transactions and to explain why firms choose between various accounting techniques. PAT attempts to explain a firm's choice of accounting methods on the basis of self-interest. PAT also provides a framework for
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